Hold gold, global currency debasement looms - Blackrock
(Kitco News) - The chief investment officer of the world’s largest asset management firm is recommending investors to hold some gold to protect themselves if central banks introduce aggressive monetary policy easing policies.
In a commentary published last week, Rick Rieder, chief investment officer of BlackRock, said that central bank action around the world has done little so far to push inflation back to 2% inflation targets. He added that if central banks want to achieve that goal they are going to have to get a lot more aggressive, which means sovereign debt yields will fall further into negative territory.
Rieder said that market forces to push inflation have become ineffective because in the new digital age, consumer have instant access to market inflation.
“Demand expands, but prices don’t rise as they did in the past, because everyone is aware of exactly what the marginal good should cost and will not pay a cent more than can be (instantly) found at the cheapest online supplier,” he said in the commentary.
This secular change in inflation means that central bank action has been ineffective, said Rieder. He added that the only other option central banks have to boost inflation is to debase their currencies.
“Despite the seemingly large size of monetary policy stimulus by historic standards, central banks have still only brought a knife to a gun fight,’” he said.
Rieder said that an endgame where central banks actively debase their currencies will mean that bond yields have to go much lower and raise the threat of a global currency war.
“Real rates will definitionally need to be negative – and in fact more negative than the real rates of competitors,” he said. “Ironically, the beggar-thy-neighbor implications of competitive devaluations will almost certainly incite a response from countries who may not originally even have needed to resort to currency debasement in the first place, raising the potential for full blown currency war.”
In this potential environment, Rieder said that investors should look at investing in real assets like real estate, and global monetary assets like gold. He added that he also likes dividend-yielding stocks.
“By definition, the worst asset to hold would be a sovereign bond with a negative yield, closely followed by paper money at zero yield, both with a theoretically infinite supply,” he said.
Although currency debasement will boost inflation, Rieder also warned that these policies would have some significant consequences like inflating real asset prices and widen the wealth gap, which would fuel more populist governments.
BlackRock has consistently looking for lower U.S. bond yields as the Federal Reserve looks to start a new easing cycle as early as next week.
In an interview with Kitco News in late June, Joyce Choi, director of fixed income product strategy at BlackRock, said that she expects to see U.S. 10-year bonds yields push below 2% as the Federal Reserve cuts interest rates by 50 basis points this year.
"We do expect one or two rate cuts in the next few months, so that would actually indicate that we should see 10-years start falling lower," she said. "The bias is towards bond yields given the inflation expectations."